# 401k tax advantage vs lower fees in taxable account

Is there a formula or rule of thumb to help determine when it's better to put money in a 401k, 403b etc. or a regular taxable account assuming similar investments and returns (for example the same index)? Match is not an issue.

I was thinking there could be some formula to plug in difference in fees, tax bracket today vs at retirement, and years remaining before retirement. Output would be estimated advantage of tax deferral.

I'm looking for more of a calculator or a formula than general rules of thumb. I already understand the general guidelines: tax deferral is better when fees are reasonable, you're in a high tax bracket now and expect to be in a lower one later, etc. But what I'm really looking for is a sense for how much the advantage is of tax deferral, quantitatively.

This is the closest I could come up with on my own:

• y = # years to retirement
• P = initial investment
• R = rate of return on underlying index/investment
• F = fee in 401k
• f = fee in taxable fund
• t/s = federal marginal tax rate now
• T/S = state marginal tax rate at retirement
• C = long-term capital gains tax rate (23.8% post-Obamacare, plus state)

Using 401k/tax deferral you end up with

[P*(1+R-F)^y] * (1-T-S)

With a taxable account you end up with

[P*(1-t-s)] * (1+R-f)^y * (1-C)

Does this remotely sound right?

• Consider contribution limits. And you can view your 401k as a temporary parking place with the goal of rolling it over into a low fee account. Commented Oct 16, 2013 at 0:21
• You have forgotten the fact that retirement funds are sheltered from the FAFSA calculations, but funds in a regular account aren't. This impacts how much money the federal government thinks your family can afford for college. Retirement funds in a 401K can also be rebalanced without triggering taxes. I have no idea what \$value that can be worth. Commented Oct 29, 2013 at 9:58